The UK will see the release of March PMI figures for the construction and services sectors on Wednesday and Thursday respectively, both at 0830 GMT. The figures, especially the one for the dominant-for-the-UK-economy services sector, have the capacity to steer the probability of an interest rate hike by the Bank of England when it next meets in May, consequently leading to movements in sterling pairs.
The upcoming Markit/CIPS construction PMI reading is anticipated to stand at 50.8 and the one for the services sector is projected to come in at 54.0. Should both prints come as expected, they would reflect a reduction relative to February’s respective figures of 51.4 and 54.5. The 50-level separates expansion from contraction in the corresponding sector.
In terms of market reaction, that is likely to be more profound in the case of the services reading, given the sector’s prominence within the UK economy, contributing around 80% of GDP.
At the moment, the odds are in favor of a Bank of England interest rate increase by 25bps upon completion of its upcoming meeting on May 10, with markets having priced in such an outcome by 73% according to UK overnight index swaps. Strong PMI readings could give an additional lift to those projections, boosting the pound along the way.
Focusing on pound/dollar, upbeat figures could see the pair advancing to meet resistance around the 1.41 round figure, before the attention starts to increasingly turn to last week’s two-month high of 1.4243. Conversely, a disappointment on the data front might see the pair heading lower. Immediate support could be taking place at the moment around the current level of the 50-day moving average at 1.3994, including the 1.40 handle that may be of psychological significance. A downside violation would shift the attention to the range around 1.39, which was relatively congested in the recent past, for additional support.
Earlier on Tuesday, manufacturing PMI numbers for the month of March were made public. Those surprised positively, coming in at 55.1 compared to the forecasted 54.7, suggesting that poor weather conditions affecting the nation did not have much of an impact on factories’ activity. Not everything was rosy though, with February’s print being revised downwards and new orders rising by the least in nine months. Moreover, manufacturing growth slid to a one-year low in Q1 2018, with Markit recognizing that UK “manufacturing has entered a softer growth phase.” For the record, manufacturing makes up around 10% of the UK economy.
The reaction by market participants to manufacturing PMI data was muted within the first minutes of data release.
In the bigger picture, pound/dollar is up by 3.9% year-to-date, with sterling recording its best quarterly performance versus the greenback since 2015 in Q1 2018. The British currency was largely helped by Brexit-related developments – trading higher relative to the euro year-to-date as well – specifically the transition deal relating to its exit from the EU secured in March. Sterling is expected to remain sensitive to any updates on Brexit issues as the year unfolds.
Lastly, it is noteworthy that a seasonal trend tends to play out in April that is supportive of a stronger pound/dollar pair and is fueled by foreign companies making dividend payments to British shareholders. Within the context of the current week though, it should be kept in mind that numerous US releases can also spur movements in the pound/dollar pair. Most notable of those is Friday’s jobs report, while the world’s largest economy will see the release of its own services PMI out of the Institute for Supply Management on Wednesday. Adding to these, an escalation of trade tensions between the US and China is seen as a dollar-negative factor.
